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Attorney General Brown Sues to Block Fraudulent Workers' Comp. Scheme

Wednesday, February 25, 2009

Contact: (415) 703-5837, agpressoffice@doj.ca.gov

San Diego -- Attorney General Edmund G. Brown Jr. today filed a lawsuit to stop the Contractors Asset Protection Association, Inc. from engaging in a “sophisticated and fraudulent scheme” to cheat the state workers compensation system.

“This company falsely promised its clients that if they gave their employees empty titles and worthless shares of stock they could avoid tens of thousands of dollars in workers compensation premiums,” Attorney General Brown said. “But you can’t simply call a security guard a vice president and avoid complying with the law through a sophisticated and fraudulent scheme.”

This lawsuit seeks a permanent injunction barring Contractors Asset Protection Association, Inc. (ConAPA) and its founder-president, Eugene Magre from engaging in unfair and deceptive business practices in violation of sections 17200 and 17500 of the California code. The lawsuit also seeks restitution and civil penalties of no less than $300,000.

The lawsuit alleges that ConAPA sought to cynically exploit a legal exception to the workers compensation law, where directors of a corporation who are also the sole shareholders can exempt themselves from workers’ compensation coverage.

Under this scheme, ConAPA marketed and advertised an unlawful business plan urging employers to misclassify rank-and-file employees as “corporate officers” and issue them nominal shares of company stock so as to avoid paying workers’ compensation insurance premiums. For example, housekeepers, cooks, security guards, maintenance men, roofers, and construction laborers were named as “vice-presidents” and issued worthless shares of non-negotiable stock.

Despite the titles, many workers were not assigned any managerial or administrative duties and performed the same rank-and-file duties for the same pay that they performed prior to their “promotion.”

ConAPA ensured that its clients were able to prevent their new “officer-shareholders” from gaining control over the business. Employees were also required to sell their shares back to the company if they left the company.

Some ConAPA clients created “dummy” corporations populated by rank-and-file “officer-shareholders” that held no real assets, and existed solely for the purpose of offering their officers back to the original client company as rank-and-file workers who were ostensibly exempt from workers’ compensation.

ConAPA told its clients that this business model was legal, and implied that the program had been scrutinized and approved by several state authorities, which it had not.

The company has approximately 40 active clients, and has had as many as 200 clients in the past that employed their business model.